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SARS says your foreign dividends are now 100% taxable in South Africa. But there are five tax-free dividends you can take advantage of

by , 20 May 2015
A few years ago, SARS took Secondary Tax on Companies (STC) away as a form of taxing dividends. Dividends Withholding Tax (DWT) replaced this.

But, with this change, SARS had to align the treatment of foreign dividends for tax purposes, as the new basis of DWT was a tax on the individual taxpayer, and no longer the company.

This meant SARS would tax you on the tax rates per the individual tax table (which could be up to 40%) instead of at the DWT rate of 15%.



So, if you hold foreign investments, or trade in other countries through subsidiaries or other group structures, you no longer have to pay a higher tax rate. You can also take advantage of a full or partial exemption of foreign dividends (Section 10B of the Income Tax Act).

Before we look at what dividends you're entitled to, tax-free, you need to know what a foreign dividend is.

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139 reasons why SARS doesn't want you to see this...

SARS is hungry for money.

Your money.

It's teetering on the edge of a R83 billion shortfall... and if it falls in, lights will go off, roads will crumble and water will become undrinkable.

So, SARS' only hope is to go after taxpayers with a vengeance.

But not individual taxpayers.

No. It's set its sights on corporate taxpayers, like you.

And that's why it doesn't want you to see this letter...

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What is a foreign dividend?

It's a dividend you receive from investments in companies located in other countries.
Now let's look at the five tax-free dividends you can take advantage of.

Five tax-free foreign dividends you can take advantage of

Pay no tax on the following foreign dividends:

1)    If you hold at least 10% of the equity shares and voting rights of the foreign company paying the foreign dividend (Section 10B(2)(a) of the Income Tax Act).

This only applies to equity shares, and not preference shares or other equity types like debentures.

This exemption doesn't apply to the foreign dividend if the foreign company can deduct the dividend for income tax purposes.

2)    If your business is a foreign company

If your business is a foreign company, and the foreign company paying the foreign dividend is resident for tax in the same country as you are (Section 10B(2)(b) of the Income Tax Act).

Example

Execorz Ltd is a French company that operates in South Africa. The South Africa branch receives a foreign dividend from Aldacorz Ltd, which is also a French company. The foreign dividend is exempt from tax in South Africa.

This exemption doesn't apply to the foreign dividend if the foreign company can deduct the dividend for income tax purposes.

3)    If you receive the foreign dividend from a controlled foreign company

If you receive the foreign dividend from a controlled foreign company (you hold more than 50% of the participation or voting rights in that foreign company), the exempt portion is the foreign dividend amount that doesn't exceed the amount you have to include in your income (Section 9D of the ITAct and Section 10B(2)(c))

Example

CapSA (Pty) Ltd owns 80% of Fransoon Ltd (a foreign company). Per Section 9D, CapSA is required to include R1 000 000 of Fransoon's net income in its own income for the 2015 tax year. Fransoon also declared a dividend of R1 500 000 for 2015.The exempt portion of the foreign dividend will be limited to R1 000 000, and the taxable portion will be R200 000 (R1 500 000 x 80% owned = R1 200 000 – R1 000 000 = R200 000).
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4)    If the foreign dividend arises for a JSE listed share

If the foreign dividend arises for a JSE listed share, but excludes a distribution of an asset in specie. It must be a cash dividend (Section 10B(2)(d) of the Income Tax Act). In specie means  'in its present form'. I.e.  you distribute a car as a car, instead of selling it and distributing the money.

5)    If the foreign dividend arises for a JSE listed share and it's a distribution of an asset

If the foreign dividend arises for a JSE listed share and it's a distribution of an asset in specie, the foreign dividend is exempt as long as you, as the recipient, are a local company. The exemption doesn't apply to individuals, trusts or other organisations who aren't a company, unless as per point 4, it's a cash dividend (Section 10B(2)(e) of the Income Tax Act).

Example

Teslan Ltd is a JSE listed US company manufacturing cars. During the 2015 tax year, they declare a dividend, comprising of an asset and money. You own 2% shares in Teslan in your own name, and 2% in your company, Elecar (Pty) Ltd. The foreign dividend comprises an electric sports car worth R1 000 000, and a cash component of R500 000.

The R500 000 is exempt locally for you as an individual taxpayer. But, SARS will tax you on the R1 000 000 car (point 4).

Elecar as a company: The R500 000 is exempt locally (point 4). The car is also exempt locally (point 5). There's no tax to pay on the foreign dividend.

But, be careful, the foreign dividend isn't fully exempt if the foreign company pays for it out of other dividends it receives. A partial exemption will apply (Section 10B(5) of the Income Tax Act).

To keep up to date on tax changes as they happen, click here

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SARS says your foreign dividends are now 100% taxable in South Africa. But there are five tax-free dividends you can take advantage of
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